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Wednesday, October 31, 2007

Capital controls against participatory notes

I have been surprised at how well the public has digested SEBI's recent moves on PNs. As an example, see M. K. Venu in ET and a debate in Business Standard.

In most parts of the economic policy debate in India, the people are deeply cynical about the motives and the competence of government, and deregulation is viewed as a good thing. The transformation of India - going from 3.5% growth in 1979 to 7.5% growth in 2007 - was critically about getting government out of a deep engagement with the economy. But in finance, there is not - as yet - a widespread appreciation of the difficulties of the license-permit raj that is in operation (though Jamal Mecklai gets it). Regulation is uncritically viewed as a good thing; audiences applaud when more restrictions and more controls are announced.

Part of the problem, of course, is that regulated firms are afraid of criticising regulators. Another part of the problem is that domestic lawyers & accountants are beneficiaries of the existing FII framework and would not be happy if India moved forward to ending the FII framework.

Amongst the sensible material that has come out is this debate between K. N. Vaidyanathan, Susan Thomas and Rashesh Shah in ET; an editorial in Indian Express; and this article in ET by Shishir Prasad.

1 comment:

Deregulate? Or re-regulate _your_ way? It is bitterly ironic that the fundamentalism of the stodgy statism that you make a living criticizing finds its twin in the fundamentalism driving your own contradictory views. First time as tragedy, second times as farce...What makes you think you've got it right this time? History? Science? Nehru had those on his side too, so he thought.

Instead of trying to make your point by speaking in all-or-nothing Bushisms, why don't you admit that the pragmatics of regulation give serious power to the regulator, and it is this power that you're after. Mecklai is at least unabashed about seeking to drive the old farts out, but even he has to couch his desire for class power in terms of the take over of Team 20/20, (please...) But at least he's more forthright. Why not use this more overtly political language instead of hiding behind a falsely naturalized truth? You just whip up fundamentalist sentiment rather than make any meaningful headway.

One piece of evidence that to my mind shows the position you subscribe to is basically a political project: circuit breakers. If the market is always right, why stop trading when things go beyond a certain point? If the aim is to manage the boundaries and let the kiddies roam free within them, this is hardly better than plain ol' enlightened despotism. This is the final irony: for all the chest-beating market fundamentalism, this regulated market is not about freedom at all.

What's that? You're not an anarchist? I know. But you're not on the side of Truth either. You're a political player, like me. You can afford to be a little more ironic about your own truths and still be politically effective. You may, after all, be wrong.

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